JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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C. SCP Trading .......................................................... 49 (1) The Early Years: 2006 to 2010 ........................................ 49 (2) 2011 SCP Expansion ................................................ 50 (3) 2011 SCP Profit From Bankruptcies .................................... 53 (4) SCP Size and Revenues .............................................. 56 (5) SCP Trader Compensation............................................ 57 (6) 2012 Opens with Order to Reduce RWA ................................ 60 (7) Eastman Kodak Default .............................................. 64 (8) Credit Market Rally Revalues SCP ..................................... 65 (9) Four Options to Reshape the SCP ...................................... 67 (10) Decision to Go Long ................................................ 72 (11) Adoption of 2012 Trading Strategy ..................................... 73 D. SCP’s Increasing Risk and Losses ......................................... 75 (1) January 2012 ...................................................... 76 (2) February 2012 ..................................................... 78 (3) March 2012 ....................................................... 81 (4) Phones Down ...................................................... 85 E. Unmasking JPMorgan Chase ............................................ 90 F. Dismantling the SCP .................................................... 92 G. Analysis .............................................................. 94 IV. HIDING LOSSES ......................................................... 96 A. Background ........................................................... 99 (1) Valuing Derivatives In General ........................................ 99 (2) Valuing Derivatives at JPMorgan Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 B. Mismarking the CIO Credit Derivatives ...................................106 (1) Mismarking Begins .................................................106 (2) Mismarking Peaks ..................................................110 (3) Increasing the Reported Losses ........................................116 (4) Trading Stopped....................................................123 (5) Accusing the Investment Bank.........................................124 (6) Mismarking Continued ..............................................130 C. Ending the Mismarking .................................................136 D. Reviewing the SCP Valuations ...........................................140 E. Admitting the Mismarking ...............................................151 F. Analysis ..............................................................153 V. DISREGARDING LIMITS .................................................154 A. Background ...........................................................155 B. Risk Management Structure at CIO .......................................158 C. CIO Risk Management Personnel .........................................160 D. Disregarding CIO Risk Metrics ...........................................165 (1) Disregarding the VaR Limit...........................................166 ii
(a) Background ....................................................166 (b)Developing a New VaR Model .....................................168 (c) Breaching the VaR Limit ..........................................172 (d)Raising the VaR Limit Temporarily .................................177 (e) Winning Approval of the New VaR Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 (f) Using the New VaR Model to Increase Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 (g)Failing to Lower the VaR Limit.....................................183 (h) Operating and Implementation Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 (2) Ignoring Comprehensive Risk Measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 (a) Background ....................................................187 (b)Challenging the CRM Results ......................................188 (c) Gaming the CRM Model ..........................................192 (3) Ignoring Repeated Breaches of Credit Spread Risk Limits . . . . . . . . . . . . . . . . . . . 198 (a) Breaching CS01 Risk Limit ........................................198 (b)Breaching CSW10% Risk Limit ....................................205 (4) Overlooking Stress Loss Limit Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 (5) Disregarding Stop Loss Advisories .....................................208 (6) Missing Concentration Limits .........................................211 D. Responding to the Risk Limit Failures .....................................213 E. Analysis ..............................................................215 VI. AVOIDING <strong>AND</strong> CONDUCTING OCC OVERSIGHT .........................216 A. Overview of OCC's Oversight Role ........................................218 B. Pre-2012: Avoiding OCC Oversight As the SCP Develops .....................220 (1) 2006-2009: Minimizing OCC Oversight As SCP Expands . . . . . . . . . . . . . . . . . . 221 (2) 2010: Resisting OCC Examination Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 (3) 2011: Missing SCP Red Flags ........................................225 C. 2012: Dodging OCC Oversight While SCP Losses Mount .....................227 (1) Misinforming OCC that SCP Book to be Reduced . . . . . . . . . . . . . . . . . . . . . . . . . 227 (2) Failing to Provide OCC with CIO Data..................................230 (3) Failing to Investigate Risk Limit Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 (4) Miscasting Long Acquisitions As Risk Reducing . . . . . . . . . . . . . . . . . . . . . . . . . . 234 D. 2012: Resisting OCC Oversight Even After Whale Trades Became Public ......236 (1) Providing OCC with Limited or Incorrect Information . . . . . . . . . . . . . . . . . . . . . . 237 (2) Updating OCC Only When Losses About to Become Public . . . . . . . . . . . . . . . . . 241 (3) Hiding Problems with the Marks .......................................244 E. OCC Aftermath ........................................................246 F. Analysis .............................................................251 VII. MISINFORMING INVESTORS, REGULATORS <strong>AND</strong> THE PUBLIC ............252 A. Public Disclosure of Whale Trades and SCP ................................255 B. Securities Laws ........................................................262 (1) Rule 10b-5 ........................................................263 (2) Section 17(a) of the Securities Act of 1933 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 iii
Page 1 and 2: United States Senate PERMANENT SUBC
Page 3: JPMORGAN CHASE WHALE TRADES: A CASE
Page 7 and 8: JPMORGAN CHASE WHALE TRADES: A CASE
Page 9 and 10: materials and reports on the whale
Page 11 and 12: (2) Hiding Losses 5 In its first fo
Page 13 and 14: 7 The ability of CIO personnel to h
Page 15 and 16: 9 incorrect information, and at oth
Page 17 and 18: 11 “fully aware” of its activit
Page 19 and 20: 13 activities to continue, includin
Page 21 and 22: 15 Senior bank management was also
Page 23 and 24: 17 specified level; and requiring d
Page 25 and 26: 19 principal bank subsidiaries are
Page 27 and 28: to assuming that post in February 2
Page 29 and 30: consisted of stressed or distressed
Page 31 and 32: 25 commuted to his job in London. 8
Page 33 and 34: 27 banks’ deposits, the OCC is th
Page 35 and 36: 29 holding down interest rates, the
Page 37 and 38: 31 combine them into a single dolla
Page 39 and 40: 33 index known as the “XO” inde
Page 41 and 42: III. INCREASING RISK 35 In 2005, JP
Page 43 and 44: 37 derivatives was unusual for a CI
Page 45 and 46: 39 provide information to the agenc
Page 47 and 48: Source: Replication of Subcommittee
Page 49 and 50: 43 costly if they do occur. 234 JPM
Page 51 and 52: 45 the SCP was expected to gain $1
Page 53 and 54: 47 bank in those scenarios. 275 Tha
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49 would not function as a hedge at
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earish. 308 According to Mr. Macris
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53 Subcommittee for more complete R
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55 until after the OCC began examin
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57 (5) SCP Trader Compensation SCP
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The compensation data for both Mr.
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the CIO to protect its $350 billion
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63 that CIO would exit the syntheti
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2012, Mr. Iksil reported internally
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67 Martin-Artajo, Mr. Macris did no
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69 20.5 Bln but the current model u
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71 Of the four scenarios laid out i
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73 during a market rally so, accord
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75 Buy protection on the tightening
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77 asked the OCC about those losses
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79 derivatives and incurring even m
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81 Drew he wanted to wait until the
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83 2012, Mr. Iksil warned his super
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poor the SCP recordkeeping was, but
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87 The order to stop trading preven
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Source: See 07/16/2012 FDIC present
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positions in newly issued credit in
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93 In another context, Mr. Dimon wa
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95 order to be substantiated. In ad
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97 agitation over underreporting SC
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A. Background 99 (1) Valuing Deriva
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which it holds a concentrated block
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103 market making groups in the Inv
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105 provide his judgment and estima
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107 of the last 16 business days --
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109 The SCP had never before experi
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111 Evidence indicates that the CIO
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113 showed that the unreported loss
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115 that the bank’s internal inve
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117 daily loss of $43 million and a
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119 On the same call, Mr. Martin-Ar
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121 Mr. Martin-Artajo: “No, no, n
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123 showing the losses, Ms. Drew to
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125 trades using the Investment Ban
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127 Mr. Macris: “… Javier has,
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129 Mr. Pinto: “Ok. And you think
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131 to the portfolio’s enormous s
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133 “In terms of the worse case s
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135 point in the year. The cumulati
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137 Subcommittee that the CIO did n
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139 Chief Investment Office Collate
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sources, and inadequate procedures
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143 CDX.NA.IG 0-3% S09 10Y 60.750 6
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145 million before adjustment to th
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147 “The Firm believes that its v
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149 That the bank’s Controller fo
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E. Admitting the Mismarking 151 Som
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153 The bank told the Subcommittee
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155 In the case of the bank’s CRM
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157 The bank’s reliance on Ms. Dr
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159 For both the bank and its busin
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161 breaches, bank documents indica
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163 “[Mr. Zubrow] bears significa
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usiness. 922 165 As a result, bank
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167 period of time to a certain deg
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169 management team in London. 941
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171 Assets (RWA) results for the CI
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173 Portfolio “maintained its ups
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175 On January 16, 2012, the CIO’
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177 The Subcommittee could identify
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chief market risk officer in London
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181 In addition, the Subcommittee w
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Value-at-Risk 183 Value-at-Risk for
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185 At the end of 2011, the SCP con
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187 The newest VaR model “resulte
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189 As discussed earlier and as out
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191 Irvin Goldman, and Peter Weilan
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“Hoping that the model is somehow
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Mr. Bangia: Um hum. 195 Mr. Hagan:
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197 allowed to categorize them in o
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199 derivatives have to be marked-t
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201 The email included a chart, exc
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203 According to the JPMorgan Chase
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205 of several months, exceeding th
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207 CIO Mark-to-Market CSW10% Breac
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209 In early December 2011 these st
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211 advisories, or simply not doing
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213 have in the IB [Investment Bank
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management. 1195 215 While each of
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217 Beginning in January and contin
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219 experts. 1201 During the period
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221 (1) 2006-2009: Minimizing OCC O
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223 CIO management needed to “doc
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225 risk personnel criticized the O
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227 bank reportedly spent $1 billio
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229 understanding: “We were infor
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231 basic reports on a timely basis
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233 report provided the OCC with we
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235 apparent in contemporaneous ban
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237 (1) Providing OCC with Limited
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239 Subcommittee that the bank’s
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241 breaching its risk limits. In a
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243 that the CIO may have been over
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245 On May 9, 2012, the OCC held a
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247 losses, litigation etc).” 140
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249 Secondly, the OCC examination t
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F. Analysis 251 The whale trades pr
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y the bank were incomplete, contain
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255 When asked in a May 10 call wit
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257 of the Volcker Rule, quoting le
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259 reporting. All of those positio
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261 that bank executives were evalu
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(1) Rule 10b-5 263 Materiality. Dis
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265 (2) Section 17(a) of the Securi
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267 At the same time, as described
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269 (2) Mischaracterizing SCP as
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Synthetic Credit Portfolio was in
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273 had increased in size since Jan
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275 respond to regulators’ questi
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277 Scenario Analysis Showed SCP Wa
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279 Source: 2/2012 “CIO February
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281 Source: 4/11/2012 email from Jo
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283 During his interview, the Subco
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285 “The synthetic credit book, a
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mitigating hedging activities,” m
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289 (6) Omitting VaR Model Change A
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291 recast the CIO’s VaR-95 total
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293 and accompanying earnings call
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295 Source: 2/2012 presentation sli
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297 The May 10 10-Q reported that a
Page 305 and 306:
299 was not, included in the bank
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301 When the SCP’s massive trades
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JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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